Works Contract Services

Important Definition

Section 65B(54): “works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

Thus, the service includes all types of services which involve transfer of property in goods during provision of such services. The services can be provided in relation to both moveable as well as immovable properties.

Provisions relating to exemptions

Vide Notification No 33/2012-ST, dated 20.06.2012 – Exemption to Small service providers having taxable turnover of less than 10 Lakhs and providing services other than by way of under a brand name.

Import of Technology

Vide Notification No. 14/ 2012-ST, dated March 17, 2012 – Exemption in respect of Taxable service involving import of technology, from so much of service tax, as is equivalent to the extent of amount of R&D Cess payable on the said transfer of technology under the provisions of section 3 of the Research and Development Cess Act, 1986.

To Foreign Diplomatic missions and their personnel

Vide Notification No 27/2012-ST, dated 20.06.2012 – Exemption for all the taxable services provided by any person, for the official use of a foreign diplomatic mission or consular post in India, or for personal use or for the use of the family members of diplomatic agents or career consular officers posted therein.

Services by TBI or STEP

Vide Notification No 32/2012-ST, dated 20.06.2012 – All taxable services provided by TBI or STEP have been exempted.

Services provided to SEZ

Vide Notification No 40/2012-ST, dated 20.06.2012, all taxable services received by a Unit located in a Special Economic Zone (SEZ) or Developer of SEZ for the authorized operations, has been exempted from the levy of whole of the service tax.

Specific Exemptions

Notification No. 25/2012 provided for the following exemptions in respect of works contract services:

12. Services provided to the Government, a local authority or a governmental authority by way of erection, commissioning, installation of –

(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(d) canal, dam or other irrigation works;

(e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or

Prior to 01.04.2015, the following structures were also covered in exemption:

(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

(f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65B of the said Act;

However, in relation to above exemption, the following exemption has again been provided w.e.f 01-03-2016 by inserting new clause (12A) in Notification No. 25/2012 which reads as under:

12A.Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of—

a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or

a residential complex predominantly meant for self-use or the use of their employees or other persons specified in theExplanation 1 to clause (44) of section 65B of the said Act;

under a contract which had been entered into prior to the 1st March, 2015 and on which appropriate stamp duty, where applicable, had been paid prior to such date:

Provided that nothing contained in this entry shall apply on or after the 1st April, 2020.

Services provided by way of erection, commissioning, installation of,-

(a) a road, bridge, tunnel, or terminal for road transportation for use by general public;

(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;

(ba) a civil structure or any other original works pertaining to the ‘In-situ rehabilitation of existing slum dwellers using land as a resource through private participation’ under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers (w.e.f. 01-03-2016).

(bb) a civil structure or any other original works pertaining to the Beneficiary-led individual house construction/enhancement under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (w.e.f. 01-03-2016);

(c) a building owned by an entity registered under section 12AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;

(d) a pollution control or effluent treatment plant, except located as a part of a factory; or

(e) a structure meant for funeral, burial or cremation of deceased;

14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,-

(a) railways, including monorail or metro (Prior to 01-03-2016, metro and monorail were also included and prior to 01.4.2015, an airport or port were also covered)

(b) a single residential unit otherwise than as a part of a residential complex;

(c) low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(ca) low cost houses up to a carpet area of 60 square metres per house in a housing project approved by the competent authority under (w.e.f 01-03-2016):

(i) the “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;

(ii) any housing scheme of a State Government.(d) post-harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

In respect of above exemption, a specific exemption for contracts prior to 1.3.2015 has been inserted w.e.f. 1.3.2016 which reads as under:

14A. Services by way of construction, erection, commissioning, or installation of original works pertaining to an airport or port provided under a contract which had been entered into prior to 1st March, 2015 and on which appropriate stamp duty, where applicable, had been paid prior to such date:

Provided that Ministry of Civil Aviation or the Ministry of Shipping in the Government of

India, as the case may be, certifies that the contract had been entered into before the 1st March, 2015:

Provided further that nothing contained in this entry shall apply on or after the 1st April, 2020;

Services by the following persons in respective capacities:

(h) sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt

Further, two sections 101 and 102 have been inserted in Finance Act, 1994 to provide retrospective relief in case of following contracts:

Section

Particular of Services

Period for which exemption granted

101

Taxable services of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of canal, dam and other irrigation work when provided to a governmental authority

01.07.2012-29.01.2014

102

Taxable services of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of non commercial civil structure or original works, structures meant for education, arts, clinical establishment, residential complex meant for persons specified in 65B(44) or their employees when provided to Government, local authority or a governmental authority in case of contracts entered prior to 01-03-2015

01.04.2015-29.02.2016

Provisions relating to Valuation and Abatement

Section 67 read along with Service Tax (Determination of Value) Rules, 2006 provides the manner of determining the value of taxable services on which services tax should be levied.

In respect of Works Contract Services, whe such services qualify as works contract is provided as under:

Type of Works Contract

Options

Manner of computation of service tax

Original Works

(a) “original works” means-

(i) all new constructions;

(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

In other cases

Service tax shall be payable on 40% cent of the total amount including such gross amount.

in case of works contract, not covered under sub-clause (A), including works contract entered into for,—

(i) maintenance or repair or reconditioning or restoration or servicing of any goods; or

(ii) maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property, service tax shall be payable on seventy per cent of the total amount charged for the works contract.

Service tax shall be payable on

70% of the total amount charged for the works contract

Levy of Service Tax on Free of cost material provided by Contractee

It has been always a dispute that while taking benefit of Valuation Rules or abatement, the value of free goods supplied by contractee be added to the consideration receveid by the asseessee to arrive at true value of service portion in the contract. i.e. to say that the arrangement of provision of free material of goods provides extra benefit to contractor as the intent of law was to provide abatement / value determination from total value of contract. However, the matter has been decided by Larger Bench in the case of of Bhayana Builders P. Ltd. v CST, Delhi (Tribunal – LB) wherein Hon’ble Tribunal examined the scope of Section 67 as under:

“(iv) The expression “consideration” occurring in the U.P. Imposition of Ceiling on Land Holdings Act, 1961 fell for consideration in Ku. Sonia Bhatia v. State of U.P. and Others – AIR 1981 SC 1274 the Court explained that since the expression “consideration” was not defined in the U.P. Act, its meaning as derived from the definition of the expression in Section 2(d) of the Contract Act, 1872 could be considered. After considering the definition of the expression in the Contract Act and referring to Black’s Law Dictionary; other dictionaries, English judgments and Corpus Juris Secundum, the Supreme Court held that : the in escapable conclusion that follows is that consideration means a reasonable equivalent for other valuable benefit passed on by the promisor to the promisee or by the transfer of to the transferee.

(v) Clearly, Section 67 of the Act deals with valuation of taxable services and intends to define what constitutes the value received by the service provider as “consideration” from the service recipient for the service provided. Implicit in this legislative architecture is the concept that any consideration whether monetary or otherwise should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the later. “Free supplies”, incorporated into construction (cement or steel for instance), even on an extravagant inference, would not constitute a non-monetary consideration remitted by the service recipient to the service provider for providing a service, particularly since no part of the goods and materials so supplied accrues to or is retained by the service provider. Wherever a monetary consideration is charged for providing the taxable service and no non-monetary consideration forms part of the agreement between the parties, it is clause (i) that applies and the value of the taxable service would in such case be the gross amount charged by the service provider and paid by the service recipient.

(vi) In Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India – 2013 (29) S.T.R. 9 (Del.), the Delhi High Court was essentially considering a challenge of the validity of Rule 5 of the Service Tax (Determination of Value) Rules, 2006. This provision was challenged to the extent it includes reimbursement of expenses in the value of taxable services for the purpose of levy of service tax. Apart from the challenge to its constitutionality, the provision was challenged on the ground that it is ultra vires the provisions of Sections 66 and 67 of the Act. The High Court held that Section 66 of the Act levies tax only on the taxable services; that this is an inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of Section 67; that on construing the provisions of Sections 66 and 67(1)(i) together and harmoniously, it is clear that the value of taxable service shall be the gross amount charged by the service provider; and nothing more and nothing less than the consideration paid as a quid pro quo for the service can be brought to charge. The High Court further held that the common thread that runs through Sections 66 and 67 and 94 (the Rule making power), manifests that only the service actually provided by the service provider can be valued and assessed to tax. The High Court concluded that the provisions of Rule 5(i) of the valuation Rules are repugnant to Sections 66 and 67 of the Act since the provision purport to tax not, what is due from the service provider under the charging section, but seeks to extract something more from him by including in the valuation of the taxable service other expenditure and costs which are incurred by the service provider in the course of providing taxable service.

(vii) In the light of the clear Legislative text, the unambiguous provisions of Sections 66 and 67 of the Act and in the light of the judgment in Intercontinental Consultants and Technocrats Pvt. Ltd. (supra), the conclusion is compelling and inviolable that the value “free supplies” by a construction services recipient, for incorporation in the constructions would not constitute a non-monetary consideration to the service provider nor form part of the gross amount charged for the services provided. Whether the legislature may enact that the value of “free supplies” should be included in the value of the service provided for levy of tax; and within its legislative competence, is an aspect that is speculative for the nonce and outside the purview of either the substantive appeals or the issue referred to us. In this view of the matter it is not necessary to consider the contention on behalf of the assessees that an interpretation that Section 67 of the Act enables or mandates inclusion of the value of goods and materials incorporated into construction services (whether provided by the service provider or as a free supplies by the service recipient) would render the legislative provision unconstitutional, since value of the goods incorporated being sale of goods would be liable to sales tax, an area within the legislative competence of State, the value of goods sold would thus be beyond the legislative competence of Parliament for levy of tax on such sale; consequently could not also constitute the value of taxable services. Ld. Counsel placed reliance on the judgment in M/s. Gannon Dunkerley and Co. and Others v. State of Rajasthan and Others – (1993) 1.”

In conclusion, the Hon’ble Court held that “from the several aids to interpretation, referred to (supra) we are compelled to conclude that goods and materials, supplied/provided/used by the service provider for incorporation in the construction, which belong to the provider and for which the service recipient is charged towards the value of such supply/provision/use and the corresponding value whereof was received by the service provider, to accrue to his benefit, whether independently specified as attributable to the specific material/goods incorporated or otherwise, would alone constitute the gross amount charged.”

Thus, it was held that free of cost material provided by Contractee would not for part of Gross valuation for the purpose of applying valuation /abatement.

Provisions relating to Cenvat Credit

The Credit is available to the service provider of the duty or tax paid on ‘capital goods’, ‘inputs’ and ‘input services’. Since all the services relating to Works Contract subject to conditions as specified in Rule 2A of Determination of Value Rules, which provides that of a service provider has availed the benefit of adhoc deduction of 60% / 30% towards goods, then the provider of taxable service shall not take Cenvat credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of Cenvat Credit Rules, 2004.

Provisions relating to point of taxation

As per Rule 3 of Point of Taxation Rules, 2011, the point of taxation shall be-

Time when the invoice for the service provided or to be provided is issued. As per Rule 4A of Service Tax Rules, invoice shall be issued within 30 days from the date of completion of service. In case invoice is not issued within 30 days from the completion of service, the point of taxation shall be the date of completion of service.

In case where the person providing the service receives payment before the time specified above, the date of receipt of payment shall be the point of taxation.

Provisions relating to Place of Provision of Service Rules, 2012

The Place of Provision of Service Rules, 2012 contains different rules for different nature of services. Since Works Contract services are required to be performed either in relation to movable goods or immovable property, the two set of Rules from Place of Provision Rules, 2012 as relevant for this category of service is as follows:

Rule 4: services provided in respect of goods that are required to be made physically available by the recipient of service to the provider of service, or to a person acting on behalf of the provider of service, in order to provide the service :

Rule 5: The place of provision of services provided directly in relation to an immovable property, including services provided in this regard by experts and estate agents, provision of hotel accommodation by a hotel, inn, guest house, club or campsite, by whatever, name called, grant of rights to use immovable property, services for carrying out or co-ordination of construction work, including architects or interior decorators, shall be the place where the immovable property is located or intended to be located.

Provisions relating to reverse charge

If services qualifies as works contract, reverse charge liability has been prescribed for service recipient as under:

Description of Service

Service Provider

Service Recipient

% of service tax payable by the person providing service

% of service tax payable by the person receiving the service

In respect of services provided or agreed to be provided in execution of works contract

Any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons located in the taxable territory

To any business entity registered as body corporate located in the taxable territory

Taxability as settled by precedents / Circulars / trade notices

If the agreement between the buyer and the developer to sell the flat is entered into before the construction is complete would be a works contract.

Yes

K Raheja development corporation vs state of Karnataka

Levy of servive tax in respect of work contract in respect of the roads i.e. works contract in regard to the improvement and repair of roads

No

Govinda Swamy Balraj v CCE, Mangalore

Held that it was not possible to apportion the consideration for design on one part and for other activities on the other part.

No

CIT v Mitsui engineering and ship building Co 259 ITR 248

Rule 3(2) of the works contract (composition scheme for payment of service tax) rules, 2007 provides that the provider of taxable service opting to pay service tax under the composition scheme is not entitled to take Cenvat credit of duty on inputs, used in or in relation to the said works contract, under

The provisions of the Cenvat credit rules,2004.

There is no restriction under Notification no. 32/2007-service tax, dated

22-5-2007 to take Cenvat credit of duty paid on capital goods and service tax paid on input services.

8.4 construction of ports is specifically exempted from levy of service tax under commercial or industrial construction service [section 65(25b)] vide Notification no. 16/2005-service tax, dated 7-6-2005. Construction of ports under the newly introduced commercial or industrial construction service provided in relation to the execution of works contract under section 65(105) has also been exempted. Accordingly, Notification no. 16/2005-service tax, dated 7-6-2005 has been rescinded and a combined Notification no. 25/2007-service tax, dated 22-5-2007 has been issued exempting commercial or industrial construction service, and services provided in relation to the execution of works contract, provided to any person by any other person in relation to construction of a port or other port. However, services such as completion and finishing, repair, alteration, renovation, restoration, maintenance or repair provided in relation to existing port or other port shall be outside the scope of this exemption and hence, leviable to service tax.

Para 9 of letter b1/16/2007-TRU, dated 22-5-2007

Services provided in relation to the execution of a works contract [section 65(105)] is a taxable service. Works contract for the purposes of levy of service tax has been defined to mean a contract wherein:

transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

such contract is for the purposes of carrying out,—

erection, commissioning or installation,

commercial or residential construction and related completion and finishing services, and

9.1 works contract is a composite contract for supply of goods and services. A composite works contract is vivisected and,—

vat/sales tax is leviable on transfer of property in goods involved in the execution of works contract [art. 366(29a)(b) of the constitution of India], and

service tax will be leviable on services provided in relation to the execution of works contract.

9.2 service tax is chargeable on the gross amount charged by the service provider for the taxable services provided (section 67). In the case of works contract, the taxable value of services is to be determined by vivisecting the composite works contract. Rule 2a of service tax (determination of value) rules, 2006 [Notification no. 29/2007-service tax, dated 22-5-2007], provides that value of works contract service shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. Thus, wherever the service provider maintains records, the value of services shall be the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the works contract.

9.3 wherever vat/sales tax on transfer of property in goods involved in the execution of works contract is paid on actual value, the same value is also taken for the purpose of determining the value of works contract service. In other cases, value of works contract service shall be determined based on the actuals. It has also been explained that value of works contract service shall include:

labour charges for execution of the works;

amount paid to a sub-contractor for labour and services;

charges for planning, designing and architect’s fees;

charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

cost of consumables such as water, electricity, fuel, used in the execution of the works contract, the property in which is not transferred in the course of execution of a works contract;

cost of establishment of the contractor relatable to supply of labour and services;

other similar expenses relatable to supply of labour and services; and

profit earned by the service provider relatable to supply of labour and services;

9.4 if the gross amount charged for the works contract is inclusive of vat or sales tax, the value for the purposes of service tax shall be computed as follows:

[gross amount charged – (value of transfer of property in goods involved in the execution of works contract and vat or sales tax paid, if any, on the said transfer of property in goods involved in the execution of the said works contract)].

9.5 as a trade facilitation measure and also for ease of administrative convenience, the service provider has been given an option to adopt the composition scheme for payment of service tax on works contract service. The works contract (composition scheme for payment of service tax) rules, 2007 has accordingly been notified vide Notification no. 32/2007-service tax, dated22-5-2007.

9.6 the scheme provides that the service provider shall have an option to pay an amount equivalent to two per cent of the gross amount charged for the works contract instead of paying service tax at the rate specified in section 66. Gross amount charged for the works contract shall not include vat or sales tax paid on transfer of property in goods involved in the execution of the said works contract. The provider of taxable service opting to pay service tax under the said composition scheme is not entitled to take Cenvat credit of duty on inputs, used in or in relation to the said works contract, under the provisions of Cenvat credit rules, 2004.

9.7 the provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and cannot be withdrawn until the completion of the said works contract.

9.9 various trade and industry associations have raised apprehension in respect of classification of a contract either under the newly introduced works contract service or under erection, commissioning or installation and commercial or residential construction services.

9.10 contracts which are treated as works contract for the purpose of levy of vat/sales tax shall also be treated as works contract for the purpose of levy of service tax. This is clear from the definition under section 65(105).

6.4 vat/sales tax is leviable on transfer of property in goods involved in the execution of a works contract. The proposed taxable service is to levy service tax on services involved in the execution of a works contract. It may be noted that under this service only the following works contracts wherein transfer of property in goods involved in execution of such works contract i s leviable to vat/sales tax, are covered, namely:—

works contract for carrying out erection, commissioning or installation

works contract for commercial or industrial construction

works contract for construction of complex

works contract for turnkey projects including engineering procurement and construction or commissioning (epc) projects.

6.4-1 works contract in respect of specified infrastructure projects namely roads, airports, railways, transport terminals, bridges, tunnels and dams are specifically excluded from the scope of the levy.

6.4-2 taxable value under this service is that part of the value of the works contract which is relatable to services provided in the execution of a works contract. Such value is to be determined on actual basis based on the records maintained by the assessee. However, it is proposed to give an option to an assessee to opt for a composition scheme. Under the composition scheme, the assessee is required to pay 2% of the total value of the works contract as service tax. Assessee opting for the composition scheme is not entitled to avail Cenvat credit of capital goods, inputs and input services required for use in the works contract. Valuation of works contract and details of the composition scheme will be notified separately.

Whether Cenvat credit of duty paid on capital godsend service tax paid on input Services can be taken by a service provider who opts to pay an amount equivalent to Two per cent of the gross amount charged for the works contract instead of paying service tax at the rate specified in section 66, under The works contract(composition scheme for Payment of service tax)rules, 2007, notified vide Notification no.32/2007-service tax, dated22-5-2007?

Rule 3(2) of the works contract (composition scheme for payment of service tax) rules, 2007 provides that the provider of taxable service opting to pay service tax under the composition scheme is not entitled to take Cenvat credit of duty on inputs, used in or in relation to the said works contract, under

The provisions of the Cenvat credit rules,2004.

There is no restriction under Notification no.

32/2007-service tax, dated

22-5-2007 to take Cenvat credit of duty paid on capital goods and service tax paid on input services.

097.02/04.01.08

Services provided in relation to execution of a works contract is leviable to service tax [section 65(105)(zzzza)]. Vat/sales tax is payable on the transfer of property in goods involved in the execution of a works contract. Service tax is leviable on the value equivalent to the gross amount charged for the works Contract less value of the transfer of property in goods involved in the execution of the works contract which is leviable to vat/sales tax[rule 2a of the service tax(determination of value)rules, 2006].

Whether or not, excise duty paid on goods, subjected to levy of vat/sales tax under works contract service, can be taken as credit under the Cenvat credit rules,2004?

Value for the purposes of Levy of service tax under Works contract service does not include the value

Pertaining to transfer of Property in goods involved In the execution of a works

Contract leviable to Vat/sales tax. Works Contract service provider is, therefore, not eligible to

Take credit of excise duty Paid on such goods involved in the execution

Of works contract.

097.03/04.01.08

Services provided in relation to execution of works contract is leviable to service tax w.e.f. 1-6-2007 [section65 (105)(zzzza)].

Works contract (composition scheme for Payment of service tax)rules, 2007 provides option to pay service tax @ 2% of the gross amount charged for the works contract. However, the service provider opting for composition scheme for payment of service tax should exercise the option prior to payment of service tax.

The issue pertains to,—

(i) contracts entered into prior to 1-6-2007 For providing erection, commissioning or Installation and commercial or residential construction service, and

(ii) service tax has already been paid for Part of the payment received under the Respective taxable service. Whether in such cases, the service provider can revise the classification to works contract service from the respective classification and Pay service tax for the amount received on or after 1-6-2007under the composition scheme?

Prior to 1-6-2007, service

Provider classified the

Taxable service under

Erection, commissioning or

Installation service [section

65(105)(zzd)], commercial

Or industrial construction

Service [section65(105)(zzq)] or construction of complex

Service [section65(105)(zzzh)], as the case

May be, and paid service

Tax accordingly. The contract for the service was a single composite contract. Part of service tax liability corresponding to payment received was discharged and the balance amount of service tax is required to be paid on or after 1-6-2007 depending upon receipt of payment.

Classification of a taxable

Service is determined based on the nature of service provided whereas liability to pay service tax is related to receipt of consideration. Vivisecting a single composite service and classifying the same under two different taxable services depending upon the time of receipt of the consideration is not legally sustainable.

In view of the above, a service provider who paid service tax prior to1-6-2007 for the taxable service, namely, erection,

Commissioning or installation service, commercial or industrial construction service or construction of complex service, as the case may be, is not entitled to change the classification of the single composite service for the purpose of payment of service tax on or after1-6-2007 and hence, is not entitled to avail the composition scheme.

5.1 Changes in the works contract (composition scheme for payment of service tax) rules,2007

These rules provide a simplified procedure for working out the tax liability by the service providers providing works contract service. Instead of working out the service element from the value of works contract and paying service tax at full rate (i.e. 10%) the service provider is allowed to pay 4% on the ‘gross amount charged’ for the works contract. The reason for prescribing the lower rate under the scheme is that the service provider need not bifurcate the gross value of works contract. It was expected that the gross value should be shown to include the total value of materials as well as services used in providing the taxable services. However, it has been reported that in certain cases, the taxpayers are not including the full value of the goods required for execution of works contract for working out service tax liability under the composition scheme by either excluding the value of goods received free of cost from their client or splitting the contract into a sale contract (for a portion of goods required to execute the works contract) and works contract (for only a portion of the total value of goods and the labor charges), thus reducing the value of works contract for the purposes of calculating service tax. In order to plug this loophole, the explanation appearing in sub-rule (3) is being amended to provide that the composition scheme would be available only to such works contracts where the gross value of works contract includes the value of all goods used in or in relation to the execution of works contract whether received free of cost or for consideration under any other contract. This condition would not apply to those works contracts, where either the execution of works contract has already started or any payment (whether in part or in full) has been made on or before the date of the amendment, i.e. 7-7-2009, from which the said amendment becomes effective (refer Notification no. 23/2009-ST, dated 7-7-2009).

Circular no. 116/10/2009-S.T., dated 15-9-2009

On a reference being received by the board, two following issues were examined for a clear understanding of facts. The first is regarding leviability of service tax on construction of canals for government projects.

As per section 65(25b) of the finance act, 1994 “commercial or industrial construction service” means —

construction of a new building or a civil structure or a part thereof; or

construction of pipeline or conduit; or

completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,

Which is —

used, or to be used, primarily for; or

occupied, or to be occupied, primarily with; or

engaged, or to be engaged, primarily in,

Commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Thus the essence of the definition is that the “commercial or industrial construction service” is chargeable to service tax if it is used, occupied or engaged either wholly or primarily for the furtherance of commerce or industry. As the canal system built by the government or under government projects, is not falling under commercial activity, the canal system built by the government will not be chargeable to service tax. However, if the canal system is built by private agencies and is developed as a revenue generating measure, then such construction should be charged to service tax.

The second issue is about government taking up construction activity of dams, buildings or infrastructure construction etc. Through epc (engineering procurement & construction) mode the said service is covered under section 65(105)(zzzza) of finance act, 1994. The said section itself excludes works contract in respect of dams, roads, airports, railways, transport terminals, bridges and tunnels executed through epc mode. Hence works contract in respect of above works even if done through epc mode are exempt from payment of service tax.

Circular no. 128/10/2010-ST, dated 24-8-2010

It has been brought to the notice of the board that the following confusions/disputes prevail with respect to long term works contracts which were entered into prior to 1-6-2007 (when the taxable service, namely, works contract came into effect) and were continued beyond that date:

while prior to the said date services like construction; erection, commissioning or installation; repair services were classifiable under respective taxable services even if they were in the nature of works contract, whether the classification of these activities would undergo a change?

whether in such cases of continuing contracts, the works contract (composition scheme for payment of service tax) rules, 2007 under Notification no. 32/2007-ST, dated 22-5-2007 would be applicable?

2. The matter has been examined. As regards the classification, with effect from 1-6-2007 when the new service ‘works contract’ service was made effective, classification of aforesaid services would undergo a change in case of long-term contracts even though part of the service was classified under the respective taxable service prior to 1-6-2007. This is because ‘works contract’ describes the nature of the activity more specifically and, therefore, as per the provisions of section 65a of the finance act, 1994, it would be the appropriate classification for the part of the Service provided after that date.

As regards applicability of composition scheme, the material fact would be whether such a contract satisfies rule 3(3) of the works contract (composition scheme for payment of service tax) rules, 2007. This provision casts an obligation for exercising an option to choose the scheme prior to payment of service tax in respect of a particular works contract. Once such adoption is made, it is applicable for the entire contract and cannot be altered. Therefore, in case a contract where the provision of service commenced prior to 1-6-2007 and any payment of service tax was made under the respective taxable service before 1-6-2007, the said condition under rule3(3) was not satisfied and thus no portion of that contract would be eligible for composition scheme. On the other hand, even if the provision of service commenced before 1-6-2007 but no payment of service tax was made till the taxpayer opted for the composition scheme after its coming into effect from 1-6-2007, such contracts would be eligible for opting of the composition scheme.

The board’s previous Circular no. 98/1/2008-ST, dated 4-1-2008and the ratio of judgment of the high court of Andhra Pradesh in the matter of m/s. Nagarjuna Construction Company limited v. Government of India [writ petition no. 6558/2008, dated 7-6-2010] are in line with the above interpretation.

10.1 a new sub-rule (2a) is being added in rule 3 in the works contract (composition scheme for payment of service tax) rules, 2007 vide Notification 1/2011-st so as to restrict the Cenvat credit to 40% of the tax paid on services relating to erection, commissioning and installation; commercial or industrial construction and construction of residential complex, in case tax has been paid on full value of the service after availing Cenvat credit on inputs i.e. Without availing exemption Notification no. 1/2006-ST, dated 1-3-2006. This has been done to ensure that the credit on inputs is not availed of indirectly while availing of the composition scheme.